Although supply chain purists might disagree, the conventional wisdom for many years has been that the focus of the procurement department has been controlling and reducing costs. While that role will always be an important one, in recent years procurement has demonstrated its capabilities in another area, one just as likely to catch the CEO's eye: innovation driver.
While cost reduction is still a priority, "many procurement organizations have reached the upper limit of cost reductions possible in categories they are actively sourcing today," explains Chris Sawchuk, leader of consulting firm Hackett Group's procurement advisory practice. "So they're looking for ways to reinvent their value proposition. A key part of this is expanding their influence, and taking a lifecycle approach to category management. This requires working more effectively with spend owners, executives, requisitioners, suppliers and other stakeholders. It also calls for skills that are outside procurement's traditional areas of expertise."
To that end, manufacturers today are turning to innovation to drive revenue growth and margin improvements. According to a recent Hackett Group survey, procurement departments are actively working to raise the level of awareness of their contributions by monitoring, measuring and reporting on their value contributions.
At Eastman Chemical Co. (IW US 500/133), an $8 billion producer of specialty chemicals, the very nature of the sourcing function has been evolving, with an ongoing transition from purchasing to procurement to strategic supply management as the company itself has shifted from producing commodity chemicals to being a provider of specialty chemicals.
"The ultimate objective of our supply chain approach is to be a reliable supplier to our customers," says Mike Berry, vice president of global procurement and chief procurement officer with Eastman. For that to happen, Eastman follows a five-pronged strategy to ensure successful supply management:
1. Integrating procurement with supply chain operations. Supply chain processes at Eastman are cross-functional, Berry notes, and capabilities are enhanced thanks to a talent management strategy that moves employees through various functions within the company.
2. Collaborating with internal business partners. To that end, Eastman aligns procurement resources with business management sales and operations planning (S&OP) teams, with the goal of sharing market insights across departments.
3. Developing supplier strategies. Different types of suppliers require different procurement approaches, Berry observes. For instance, with commodity suppliers, Eastman focuses on cost, while with suppliers who operate as strategic suppliers, the focus is on driving value and innovation.
4. Continually developing and improving capabilities to deliver results. Eastman utilizes advanced technology (such as inventory optimization) to automate its supply chain processes, Berry notes, while enhancing the leadership skills of its staff through robust succession plans and strategies.
5. Contributing to the company's success. "We in procurement are known as non-traditional thinkers, even contrarians, in our approach to analyzing markets," Berry says. "We focus more on market insights and business strategy than traditional procurement," in such ways as leveraging alternate methods and sources of supply, and gaining competitive advantage through creative contracts that engage suppliers in driving innovation.
Eastman's efforts mirror some of the recommendations from Hackett Group's research. Procurement's risk mitigation efforts should focus on identifying signs of financial distress among suppliers, evaluating alternative sourcing arrangements, and running what-if scenarios to recognize supply network risks and build resiliency. In particular, Hackett Group suggests that manufacturers pre-qualify suppliers to ensure they're able to handle sensitive data, an effort that also involve a company's IT department.
"Procurement must know how to document its own innovation and the impact it has on enterprise growth and be able to convince the rest of the organization that procurement's expanded value proposition is real," Sawchuk suggests.